June 23, 2015

China: Consumer Staples

Equity Research : The Final Frontier; potential for industry profit pool to expand 3-7x

An awakening giant: 3-7x profit pool Who are “ready”, “willing” and “able”? RELATED RESEARCH potential We identify potential combinations among the CRE: Up to Buy on beer pure play; re-rating on higher China is the world’s largest beer market by eight beer companies with China exposure. The growth vs Tsingtao – published April 23, 2015; volume, but beer prices are among the lowest due transaction most likely to redefine the market Tsingtao: Volume drop not priced in; premium brand to years of intense competition. We estimate the landscape would be if ABI were to acquire SAB challenged; down to Sell – published February 12, 2015 ABI: The compound king; reiterate Buy and add to the current beer industry profit pool at just US$1.1bn, globally and also successfully retain a partnership Conviction List – published October 9, 2014 or 15% the size of that in the US, despite more with CR . Their combined market share is KEY CHART: GSe China beer profit pool from US$1bn than double the volumes. Driven by faster 41% and synergies would be significant. Tsingtao in 2014 to US$3bn-7bn by 2019E

China Beer North America Beer China Scenario 1 China Scenario 2 premium beer market growth and consolidation, also has M&A options, but with lower synergies. Industry volume (K tons) our scenario analysis shows the profit pool in 70,000 China 2019E Scenario 1: Government approval: Hurdle not barrier US$3.1bn China could reach US$3bn to US$7bn by 2019E. 60,000 China 2019E Scenario 2: Government approval may prove to be the biggest China 2014: US$1.1bn US$6.9bn 50,000 Approaching last orders hurdle. Concerns include anti-competition and 40,000 As one of the last big global beer markets yet to foreign ownership of iconic consumer brands. fully consolidate, China’s beer companies earn 30,000 However, application of the Anti-Monopoly Law US 2014: US$7.5bn operating margins below the global average and has been lenient in the past. SOE reform classifies 20,000 shy of 10%. With the Top 5 players now holding beer as a competitive industry where majority 10,000 c.75% of the market, and buyers with money in - government ownership is not critical. 60,000 80,000 100,000 120,000 140,000 Industry retail their pockets, we are approaching “last orders”. sales (US$mn) Filling the bottle: Key stock calls Source: Goldman Sachs Global Investment Research. We expect M&A to rise given: 1) global and China: Buy CRE, Sell Tsingtao given CR Snow’s i) domestic players are facing challenges growing stronger growth, ii) more attractive valuation, and organically; 2) unlevered balance sheets; 3) iii) a ‘free option’ for earnings upside from industry attractively priced China assets; and 4) recent SOE consolidation. Europe: Buy ABI (CL) on cash reform is more welcoming of strategic deployment/synergies and SAB on high growth investments. exposure. Sell Carlsberg on structural challenges. Lisa Deng +852-2978-0528 [email protected] Goldman Sachs (Asia) L.L.C. Goldman Sachs does and seeks to do business with companies Mitch Collett covered in its research reports. As a result, investors should be aware +44(20)7774-1060 [email protected] Goldman Sachs International that the firm may have a conflict of interest that could affect the Nicole Thain objectivity of this report. Investors should consider this report as only a +44(20)7552-4397 [email protected] Goldman Sachs International single factor in making their investment decision. For Reg AC Keiko Yamaguchi +81(3)6437-9980 [email protected] Goldman Sachs Japan Co., Ltd. certification and other important disclosures, see the Disclosure Appendix, or go to www.gs.com/research/hedge.html. Analysts employed by non-US affiliates are not registered/qualified as research analysts with FINRA in the U.S.

The Goldman Sachs Group, Inc. Global Investment Research June 23, 2015 China: Consumer Staples

Table of contents

Executive summary: China Beer – approaching last orders 2 Got beer? China’s market offers the highest growth globally over the next five years 8 Stars may be aligning for an industry “big bang” 12 Government approval the biggest hurdle 19 Who are “ready”, “willing” and “able” parties? 21 Transactions that could create the right brew; ABI-SAB-CR Snow, Tsingtao-CR Snow 25 Appendix 1: China’s beer industry – premiumization the key catalyst 28 Appendix 2: A lesson from the US; not everyone is a winner in industry consolidation 32 Disclosure Appendix 34

Prices in this report are as of the June 18, 2015 market close unless indicated otherwise.

Executive summary: China Beer – approaching last orders

A common frustration with the China beer ‘consolidation story’ is that despite 15 years of ongoing industry consolidation, significant earnings improvement has not yet transpired. However, with the Top 5 companies now holding nearly 75% market share of volumes and external factors aligning, we believe further consolidation could fundamentally redefine the market landscape and competitive position.

In this report, we attempt to answer three key questions:

1) Why is it important for investors to pay attention to China’s beer industry?

2) Why now?

3) How & Who – How the events could transpire, and which parties could be involved?

Our analysis is not conclusive and we do not intend it to be so. However, we aim to help frame the discussion on the progress of China’s beer industry based on several requisite conditions domestically, and globally. In the end, not all players benefit equally from industry consolidation (as witnessed in the US) and we set out our key stock recommendations based on our fundamental analysis of each player’s competitive position and valuation. Key stock calls – China: CRE (Buy), Tsingtao (Sell); Europe: ABI (CL- Buy), SAB (Buy), Carlsberg (Sell).

Goldman Sachs Global Investment Research 2 June 23, 2015 China: Consumer Staples

Why: Profit pool to increase from US$1bn in 2014 to US$3bn-7bn by 2019E China is the world’s largest beer market by volume – and is more than double the size of the US market – but its ASP of beer is one of the lowest. For years, intense competition has suppressed prices and built excess capacity, and we estimate the current industry profit pool in China is just US$1.1bn compared to US$7.5bn in the US. With domestic players (CR Snow, Tsingtao and Yanjing) all earning below 10% operating profit margins in 2014, we see a clear upside opportunity towards the 20% plus EBIT margins earned by global peers in more consolidated markets such as the Americas and Africa where the best brewers can earn over 30% EBIT margin. We expect China’s beer retail sales to increase by an 8% CAGR over 2014-2019E to reach US$110bn, driven by our assumptions of an annual 5% price increase and 2.4% volume increase. Based on scenario analysis, we calculate a potential industry profit pool of US$3.1bn-US$6.9bn by 2019E (vs. US$1.1bn currently), driven by premiumization and further market consolidation.

Exhibit 1: We forecast China’s beer industry profit pool could move from the current US$1.1bn level to US$3bn-7bn by 2019E Beer industry profit pool in China and the US, 2014E/19E

China Beer North America Beer China Scenario 1 China Scenario 2

Industry volume (K tons)

70,000 China 2019E Scenario 1: US$3.1bn

60,000 China 2014: US$1.1bn China 2019E Scenario 2: US$6.9bn

50,000

40,000

30,000

US 2014: US$7.5bn

20,000

10,000

- Industry retail 60,000 80,000 100,000 120,000 140,000 sales (US$mn)

Note: Estimate of current industry profit level based on: 1) announced operating profits of major industry players; and 2) an estimated percentage margin for remainder of smaller players in the market.

Source: Goldman Sachs Global Investment Research

Goldman Sachs Global Investment Research 3 June 23, 2015 China: Consumer Staples

Why now: The case for an industry “big bang” China beer consolidation has been ongoing for the past 15 years but has failed to redefine market structure as deals have been limited to small-mid-sized players. With the Top 5 beer companies in China now holding c.75% market share, further consolidation among these players could mean a fast and radical change to market structure. Moreover, we view that external conditions are now aligned, including: 1) the return of industry players to acquisitive growth; 2) unlevered balance sheets; 3) asset values in China appear attractively priced; and 4) recent China SOE reform adopts a more welcoming stance towards foreign investment.

How & Who: The “ready”, “willing” and “able” parties Using “ready” (industry regulation, company specific hurdles), “willing” (strategic fit) and “able” (financially capable) criteria we identify potential combinations among the eight beer companies that have exposure to China. Our analysis shows that the biggest transactions with regards to market share would be: 1) CR Snow-Tsingtao (43% combined market share, based on 2014 data); or 2) CR Snow-ABI (41%). While a CR Snow-Tsingtao combination could be limited by company specific ownership hurdles, ABI acquiring SAB globally and successfully retaining a partnership with CR Snow would likely be the most transformational to the market landscape.

Government policy is likely to be the biggest hurdle to industry consolidation given anti-trust and government ownership concerns although we do not believe that it is unsurmountable. Historical application of Anti-Monopoly Law in China defines a “market influential” position as two players having 66% or more market share. Moreover, all except one transaction in the Consumer Staples sector in China since 2009 has been approved. Last but not least, recent SOE reform guidance from Beijing has classified beer as a competitive market, where majority government ownership is not seen as crucial.

Key stock calls

China CRE (Buy) – After the pending disposal of CR Retail (announced April 21, 2015), CRE will become a beer pure play – CR Snow. Fundamentally, we see that CR Snow is entering a virtuous cycle of product and price upgrades, which allows the company to re- invest into market share and premium branding. In 2015/16E, we expect strong 8% topline growth activated by strong positive mix shift from mass-market to mid-high end products. As margins improve, we expect 2-year 15% beer EPS CAGR, ranking above average within China consumer staples. The current share price of HK$25.8 for CRE implies HK$13.5/sh for beer after adjusting for HK$12.3/sh related to the pending disposal of all non-beer businesses. This implies a 12.8x 2016E EV/EBITDA for CR Snow, which is at a 20% discount to domestic peer Tsingtao’s 16x EV/EBITDA. Potential earnings upside for CR Snow from our expectation of continued M&A in the industry provides an attractive ‘free option’.

Tsingtao (Sell) – Tsingtao’s volume and ASP growth has been a laggard against key domestic and multinational corporation (MNC) competitors. Given historical under-investment, we see the company now faced with the difficult decision of either: 1) stepping up marketing spend to re-invigorate the premium Tsingtao brand; or 2) continuing to focus on profits and slash SG&A heavily despite a falling topline. Either way, we see Tsingtao’s 2015E/16E EPS growth as disappointing, at 1% CAGR.

Goldman Sachs Global Investment Research 4 June 23, 2015 China: Consumer Staples

Europe ABI (CL-Buy) – We expect ABI’s EPS to double within four years, driven by cash deployment and synergies. ABI benefits from some of the most favorable competitive positioning in global staples but lacks growth and we believe cash use can be both growth and earnings accretive. Our EPS forecasts are 20% ahead of Bloomberg consensus for CY16.

SAB (Buy) – In our view, SAB is one of the best positioned companies in ; with access to early stage beer markets combined with dominant market shares in a consolidated industry, making it the most strategic asset in the sector. In an environment of cheap financing and stagnating growth we believe that cash deployment will be the key growth driver for the sector.

Carlsberg (Sell) – We believe Carlsberg should trade at a c.25% discount to the European staples sector given the company’s inferior financial growth outlook from over-exposure to structurally challenged markets in Europe and Russia.

Exhibit 2: Global and domestic beer companies with exposure to China – operational and financial comparison

Total Beer Operating Company Ticker GS rating Market cap revenue Volume profit Key brands Key markets China Strategy US$mn US$mn mn litre US$mn ABI ABI.BR Buy* 194,516 47,063 45,901 15,247 Budweiser, Corona, North America, Latin Focus on both volume and ASP growth; Organic and Stella, Becks America, Asia inorganic expansion, prefer majority control M&A; Focus brand: Budweiser, SABMiller SAB.L Buy 84,160 18,704 30,856 4,875 Peroni, Pilsner, Miller, South Africa, East Europe, Owned 49% stake of CR Snow JV; Operate almost Grolsch US, China entirely via the JV Heineken HEIN.AS Neutral 44,414 25,405 18,100 3,545 Heineken, Amstel, West Europe, Nigeria, China not a priority market, only operate in premium Tiger, Sol Mexico, South East Asia segment Carlsberg CARLb.CO Sell 14,278 11,478 12,280 1,504 Carlsberg, Tuborg West Europe, Russia, Expand organically and through acquisitions; South East Asia Dominates in Western China Asahi 2502.T Neutral 15,793 4,854 2,066 1,104 Asahi Japan Target to expand its 'Super Dry' brand in full scale but has limited success; Own 20% Tsingtao stake CRE 0291.HK Buy 8,019 4,081 11,842 284 CR Snow China Focus on combination of volume and ASP growth;

Tsingtao 0168.HK Sell 8,513 4,360 9,154 312 Tsingtao China Previously emphasized more on volume growth since 2011; Switch to ASP growth post 2014 Yanjing 000729.SZ CS 5,742 1,999 5,321 158 Yanjing China Dominant player in Beijing, seek opportunities to expand outside Beijing Notes: *Denotes stock is on our regional Conviction List. Data for CS (Coverage Suspended) stocks from Bloomberg. Financial and operational data as of 2014.

Source: Bloomberg, Company information, Goldman Sachs Global Investment Research.

Goldman Sachs Global Investment Research 5 June 23, 2015 China: Consumer Staples

Exhibit 3: Beer & Alcohol companies – summary global comps

BBG Ticker Name Mkt Cap Last GS Target List EPS 14-16E PE PE EV/EBITDA EV/EBITDA P/B Div Yield ROE Close Rating Price Crncy 6M Chg CAGR CY15 CY16 CY15 CY16 CY15 CY15 CY15 US$m Price L.C. L.C. % % (X) (X) (X) (X) (X) % % China Brewers Price TP 168 HK Tsingtao H 9,700 48.9 Sell 41.10 HKD (5.5) 0.3 29.0 26.2 17.0 15.9 3.2 1.1 11.4 12m EV/EBITDA Stronger-than-expected Tsingtao brand growth; M&A lifting overall market timeframe TP methodology Company specific risk profits; issuance of performance based mgmt. incentives. 600600 CH Tsingtao A 9,700 50.7 Sell 32.60 CNY 21.2 0.7 37.5 33.9 21.2 19.8 4.1 0.8 11.4 12m EV/EBITDA Stronger-than-expected Tsingtao brand growth; M&A lifting overall market profits; issuance of performance based mgmt. incentives. 291 HK CRE 7,886 25.8 Buy 28.50 HKD 64.4 nmf nmf 77.5 13.2 11.1 1.3 1.0 0.0 12m SOTP Failure to secure disposal approval; lower than expected beer sales growth; higher SG&A expense ratio due to peak season competition. CR Snow (implied) 16.4 36.9 31.7 13.5 12.8 7.0

000729 CH Beijing Yanjing 5,408 11.8 CS CNY 49.4 12.9 39.4 36.2 nmf nmf 2.6 0.8 6.7 N/A N/A N/A Average 28,045 34.6 42.5 17.4 15.9 2.9 0.9

Global Brewers ABI BB Anheuser Busch 195,966 107.2 Buy* 131.0 EUR 14.5 25.0 21.6 17.2 14.8 13.6 3.8 3.1 18.8 12m P/E Adverse currency movements; Reduced M&A spend or dilutive transactions; SAB LN SABMiller 86,374 3,363.0 Buy 3,700.0 GBp (0.4) 7.3 21.2 20.4 14.2 13.5 3.4 2.0 14.7 12m EV/EBITDA (1) weaker than expected trading in one of SAB’s key markets (2) adverse currency moves; HEIA NA Heineken 44,293

67.6 Neutral 72.0 EUR 13.9 14.2 18.9 16.5 10.6 9.9 2.9 1.9 14.0 12m P/E Improvement/deterioration in key markets, adverse regulation, rise/fall in input costs, value accretive/destructive M&A and FX volatility. CARLB DC Carlsberg 14,410 612.5 Sell 470.0 DKK 28.0 1.2 18.9 16.9 10.3 9.6 1.7 1.4 8.8 12m P/E (1) faster than expected beer market growth in Russia; (2) easing FX pressures (3) Input cost benefit 2502 JP Asahi 15,842 4,038.5 Neutral 4,000.0 JPY 4.5 15.4 24.1 21.2 11.0 10.2 2.1 1.2 8.6 12m Directors' Cut Greater-than-expected growth in beer sales on economic recovery, Lower domestic alcoholic beverage/soft margins 2503 JP Kirin 12,901 1,743.0 Neutral 1,800.0 JPY 14.8 52.0 25.2 21.4 9.6 9.1 1.9 2.2 6.5 12m Directors' Cut Greater-than-expected earnings growth in Brazil due to growth in market share, Deterioration in capital efficiency due to M&A TAP US Molson Coors 13,686 73.7 Neutral 79.0 USD (2.9) 1.0 19.0 17.5 11.9 11.0 1.8 2.2 9.3 12m P/E and Volume upside/downside, price competition, FX volatility, M&A EV/EBITDA AEFES TI Efes 5,255 24.1 Neutral 25.6 TRY 9.5 nmf 40.1 24.7 11.8 9.5 1.9 1.0 4.6 12m SOTP Higher than expected beer volumes/pricing in international and domestic markets. Further increases in taxes in Turkey; Russia Average 391,567 21.4 18.2 13.5 12.6 3.3 2.5

China Spirits 600519 CH 44,900 243.97 Buy* 260.85 CNY 35.0 14.4 15.6 13.2 9.2

7.8 4.4 2.9 30.6 12m PEG Slower-than-expected industry recovery

000858 CH 17,767 30.33 Buy 28.65 CNY 45.2 15.6 17.3 14.8 9.0 7.4 2.6 2.3 16.0 12m PEG Recovery slower than expectations

000568 CH 6,229 27.89 Neutral 21.23 CNY 37.5 58.2 21.1 17.8 13.1 11.4 4.2 6.1 19.6 12m PEG Stronger/weaker-than-expected ASP/volume recovery in the high-end spirits market 002304 CH Jiangsu Yanghe 16,371 70.48 Buy 69.97 CNY 38.2 18.5 20.1 16.8 12.6 10.4 4.7 2.4 25.1 12m PEG Industry recovery slower than expected.

600809 CH Shanxi Xinghua 3,657 26.29 Neutral 21.01 CNY 16.6 45.4 42.2 30.2 23.9 17.5 5.1 - 13.0 12m PEG Stronger/weaker-than-expected ASP/volume recovery in the high-end spirits market.

Notes: *Denotes stock is on our regional Conviction List. All target prices mentioned above are on a 12-month basis. Data for CS (Coverage Suspended) stocks from Bloomberg.

Source: Bloomberg, Goldman Sachs Global Investment Research.

Goldman Sachs Global Investment Research 6 June 23, 2015 China: Consumer Staples

Exhibit 4: Identifying the “ready”, “willing” and “able” parties

Potential Acquirer

Yanjing Tsingtao CR Snow SAB Miller Carlsberg ABI

Yanjing Note 1 Note 1 Note 1 Note 1 Note 1

N/A Strategic fit? √√ √√

N/A Financially Capable? √ √ √√

N/A Combined China beer volume share? 30% 35% 16% 28%

N/A Regulatory support? √ X √√

N/A Void of company specific hurdles? √ √ √X Tsingtao Note: 2 Note: 2 Note: 2 Note: 2

N/A Strategic fit? N/A √ √√

N/A Financially Capable? X √ √√

N/A Combined China beer volume share? N/A 43% 24% 36%

N/A Regulatory support? N/A X √X

N/A Void of company specific hurdles? N/A X XX Potential Target CR Snow Note: 3 Note: 3 Note: 3 Note: 8 SAB currently owns 49% of CR Strategic fit? N/A √ Snow √√

N/A Financially Capable? X √ √√

N/A Combined China beer volume share? N/A 43% 29% 41%

N/A Regulatory support? N/A X √X

N/A Void of company specific hurdles? N/A X XX SAB Miller Note: 8 SAB Miller is already the 49% Strategic fit? N/A N/A JV partner to CR Snow N/A √

Financially Capable? X X X X √

Combined China beer volume share? N/A N/A N/A N/A China: 43%

Regulatory support? N/A N/A N/A N/A X

Void of company specific hurdles? N/A N/A N/A N/A X Notes: The above Exhibit is a condensed version of Exhibits 22 and 23 that aim to identify potential combinations for the eight beer companies with exposure to China. Our full reasoning and opinions are presented in those exhibits and accompanying notes (see pages 21-25 for more detail). Dark grey: financially not feasible; Light grey: strategically not compatible; Blue: existing partnership, market share data as of 2014 full year.

Source: Company data, China’s Ministry of Commerce (MOFCOM), Goldman Sachs Global Investment Research.

Goldman Sachs Global Investment Research 7 June 23, 2015 China: Consumer Staples

Got beer? China’s market offers the highest growth globally over the next five years

Large volumes but low prices At c.50mn tons, China’s beer industry volumes in 2014 were the largest in the world¸ double that of next largest country, the US. However, due to years of intense competition – as seen in the country’s low Herfindahl Index (Exhibit 7) – beer prices in China are among the lowest in the world, at US$1.6/Ltr vs. US$4.1/Ltr in the US (as of 2014). In addition, a race for market share has created excess capacity and lower operating efficiency, leading to an industry operating profit pool of just US$1.1bn vs. US$7.5bn in the US, per GS estimates.

Over the next five years to 2019, we expect pricing growth to be a major industry growth catalyst in China. We forecast industry ASP CAGR of 5% over 2014-2019E, driven by a strong premiumization tailwind and further industry consolidation reducing competitive intensity (the Top 5 players had c.75% market share as of 2014). Volume growth is likely to be moderate as annual beer per capita consumption of 37Ltrs in 2014 is already above the world average. Net net, we forecast 7.6% industry sales CAGR over 2014-2019E, which would push China beer retail sales from the current level of US$77bn to US$110bn, just below Euromonitor’s forecast for 2019 US beer retail sales of US$122bn. We believe the incremental US$33bn revenue upside in China is likely to make it the largest growth opportunity in the global beer industry.

Exhibit 5: China consumed c.50mn tons of beer in 2014, the highest in the Exhibit 6: …but China’s beer retail prices are among the lowest in the world, world and double that of the US… at US$1.56/Ltr vs US$4.1/Ltr in the US Beer industry volumes by country, 2014 (K tons) Beer retail sales price by country, 2014 (US$/Ltr)

Beer inudstry volumes (K tons) Retail sales price/Ltr (US$) 60,000 9

8 50,000

7

40,000 6

5 30,000 4

20,000 3

2

10,000 1

0 0

Source: Euromonitor. Source: Euromonitor.

Goldman Sachs Global Investment Research 8 June 23, 2015 China: Consumer Staples

Exhibit 7: China has a low Herfindahl index, suggesting a fragmented market Exhibit 8: We estimate China’s beer industry profit pool is just US$1.1bn with more intense competition compared to US$7.5bn in the US, due to low ASP despite larger volumes Beer industry Herfindahl index by country, 2014 Beer industry EBIT pool, 2014 (US$mn) 100.0% China Beer North America Beer 90.0%

Industry volume (K tons) 80.0% 70,000

70.0% China beer industry operating 60,000 profit pool 2014: US$1.1bn 60.0%

50,000 50.0%

40,000 40.0%

30,000 US beer industry 30.0% operating profit pool 2014: US$7.5bn 20.0% 20,000

10.0% 10,000

0.0%

UK - Industry retail USA India

Brazil 60,000 65,000 70,000 75,000 80,000 85,000 90,000 95,000 100,000 105,000 110,000 Spain China Japan sales (US$mn) Russia France Poland Mexico Canada Ukraine Vietnam Thailand Colombia Venezuela South Africa South Korea Note: The Herfindahl index is a measure of market concentration, calculated as the sum of each firm's Note: Estimate of current industry profit level based on: 1) announced operating profits of major industry market share squared. players; and 2) an estimated percentage margin for remainder of smaller players in the market.

Source: Euromonitor. Source: Company data, Goldman Sachs Global Investment Research estimates. Exhibit 9: We forecast China’s beer retail sales to reach US$110bn by 2019E, Exhibit 10: We forecast China beer retail sales to grow at a 7.6% CAGR over just below the US figure of US$122bn (Euromonitor) the next 5 years, driven by 5% ASP and 2.4% volume growth annually China beer retail sales (US$mn) China beer retail sales, volume and ASP growth (% YoY)

Beer industry retail Mass & Others Mid Premium sales, US$mn Industry sales YoY Volume growth YoY 140,000 ASP growth YoY

120,000

36,912 25.0% 100,000 32,114 27,862 20.0% 24,173 80,000 20,973 18,196 15.0% 15,787 12,031 39,329 33,276 60,000 8,890 30,490 27,936 10.0% 6,595 25,597 23,453 19,601 21,489 17,427 5,047 16,058 5.0% 40,000 4,282 13,898 12,044 0.0% 43,716 44,595 45,120 46,282 20,000 40,933 39,495 41,121 42,542 35,451 37,715 25,636 28,688 -5.0%

0 2009 2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E US 2019E Note: Euromonitor forecast for US beer retail sales 2019.

Source: Euromonitor, Goldman Sachs Global Investment Research Source: Euromonitor, MOFCOM, Goldman Sachs Global Investment Research

Goldman Sachs Global Investment Research 9 June 23, 2015 China: Consumer Staples

Significant upside to current US$1.1bn industry profit pool From a profit perspective, we see significant growth potential from the current US$1.1bn industry profit pool in China. As shown in Exhibit 12, there is a high correlation between profitability and market share. In the more premium, but also more fragmented market of Europe, the EBIT margin of beer companies averages c.10%-15% due to higher beer prices versus China, but a still more competitive environment vs. Latin and North America. For the Americas and Africa, Exhibit 12 shows that most industry leaders with market share in excess of 40% earn EBIT margins above 20%, with many of the best brewers earning over 30% EBIT margin.

Based on the evolution of other global markets, we map out two potential scenarios for the progression of the beer industry profit pool in China over the next five years: Scenario 1: Organic competition – Based on a scenario of stronger pricing growth, but still competitive market structure (as market share is more evenly distributed between the top players in China), we expect industry EBIT margins to increase from current levels of c.5% to 10% by 2019. Under this scenario, we forecast the industry profit pool increasing from US$1.1bn currently to US$3.1bn by 2019; and Scenario 2: Inorganic competition – If we assume that on top of organic growth, further M&A in the industry drives faster consolidation and reduces competitive pressure on prices, as well as lifting overall industry efficiency in the next five years, we believe industry margins could improve to 20% as a ‘blue sky’ scenario. Under this scenario, we forecast the industry profit pool in China could increase to US$6.9bn by 2019. In particular, we believe that in the home markets of the domestic players – e.g. Tsingtao in Shandong and CR Snow in Liaoning – EBIT margins of c.20% are achievable.

Exhibit 11: We forecast China’s beer industry profit pool could move from the current US$1.1bn level to US$3bn-7bn by 2019E Beer industry profit pool in China and the US, 2014E/19E

China Beer North America Beer China Scenario 1 China Scenario 2

Industry volume (K tons)

70,000 China 2019E Scenario 1: US$3.1bn

60,000 China 2014: US$1.1bn China 2019E Scenario 2: US$6.9bn

50,000

40,000

30,000

US 2014: US$7.5bn

20,000

10,000

- Industry retail 60,000 80,000 100,000 120,000 140,000 sales (US$mn)

Note: Estimate of current industry profit level based on: 1) announced operating profits of major industry players; and 2) an estimated percentage margin for remainder of smaller players in the market. Source: Goldman Sachs Global Investment Research

Goldman Sachs Global Investment Research 10 June 23, 2015 China: Consumer Staples

Exhibit 12: Chinese brewers currently under-earn vs. global peers due to a more fragmented market with higher competition EBIT50% margin vs. market share, 2014

45%

ABI LAN 40%

ABI LAS R² = 0.4198 35% ABI NA

30%

Modelo 25%

margin Heineken AP

SAB LA Heineken MEA

EBIT 20% Carlsberg EE SAB Africa ABI WE 15% Carlsberg AP Heineken America

SAB NA SAB EUR 10% SAB Asia Carlsberg NEW Heineken WE ABI AP Heineken CEE 5% Yanjing CR Snow Tsingtao

0% 0% 10% 20%ABI CEE 30% 40% 50% 60% 70% 80% Blended market share

Source: Company data, Euromonitor.

Goldman Sachs Global Investment Research 11 June 23, 2015 China: Consumer Staples

Stars may be aligning for an industry “big bang”

M&A between the Top 5 beer companies could drive industry “big bang” Beer industry consolidation has been ongoing in the last 15 years in China, but has failed to redefine market share dynamics since deals have generally been limited to small-mid-sized players. However, with the Top 5 beer companies currently holding c.75% of the market (Top 4 with c.70% and Carlsberg with c.5%), we believe further consolidation among them could bring speedy and radical changes to the market.

From a timeline perspective, recent indicators in the global beer market suggest that a confluence of factors may catalyze further an industry transformation. Our view is substantiated by the following analysis:

1) A return to acquisitive growth by global and domestic players. Our European Food and Beverages analyst Mitch Collett expects ABI to return to material acquisition spend in 2016 (see ‘Anheuser-Busch InBev (ABI.BR): The compound king; reiterate Buy and add to the Conviction List’, published October 9, 2014) and we believe Tsingtao may consider cash deployment to reinvigorate its stalled topline growth; 2) Comfortable balance sheets and an ability to gear up; 3) China beer assets are attractively valued on an EV/Ltr (US$) basis (Exhibits 18 and 19); and 4) China’s recent SOE reform puts forth a more welcoming policy stance to strategic investment in competitive industries including beer.

Exhibit 13: China’s Top 5 beer companies currently hold c.75% market share; further consolidation within the Top 5 could drive significant market structure changes Beer industry volume share in China

100% 2% 5% 5% 9% 10% Carlsberg 10% 10% 10% 10% 11 % 11 % 11 % 11 % 90% 11 % 11 % 5% Yanjing 2003 9% 11 % 13% 13% 12% Top 5 80% 13% 13% 12.8% 14% 14% share: 15% 17% 13% ABI 2014 37% 13% 70% 13% 13% 13% Top 5 10% 14% 14% 15% 16% share: 11 % 75% 60% 17% 19% 13% Tsingtao 15% 18% 18% 50% 20% 21% 21% 22% 40% 23% 24% CR Snow 63% 30% 57% 52% 48% 45% 45% 20% 40% 39% 38% 35% Others 28% 25% 10%

0%

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Source: Company data, MOFCOM.

Goldman Sachs Global Investment Research 12 June 23, 2015 China: Consumer Staples

1. Global and domestic beer companies may return to acquisitive growth Globally, we have seen beer company revenues and EPS growth come under pressure due to maturing markets, rise of substitutes, and gradual exhaustion of efficiency gains. As shown in Exhibits 14 and 15, among six key players looked at with exposure to China, four saw a sales slowdown in 2014, while three recorded EPS declines. Revenue and EPS growth for ABI, the world’s biggest beer player in terms of market cap, led the industry with growth of 9% for both in 2014, thanks to continued expansion in Emerging Markets (EM) such as China, and also the extraction of cost synergies from its Modelo acquisition in 2012. Given its free cash generative business model, the company also continues to repay debt taken on to acquire Modelo, reducing interest expense. Our European analyst Mitch Collett expects that synergies with Modelo will be largely complete in 2015 and that ABI will return to material acquisition spend in 2016 (see aforementioned ABI report for further details).

Domestically in China, the second largest player – Tsingtao – has also been experiencing noticeable market share loss in the premium beer category (Tsingtao’s main brand posted flat growth in 2014, vs. double-digit growth for ABI’s Budweiser in China) due to prolonged under-investment. The company recorded sales growth of just 3% and operating profit growth of 1% in 2014 but is in a net cash position. With the announcement in June 2014 that a management incentive plan will be launched no later than June 2020, we believe Tsingtao’s management is under increasing pressure to perform (the sooner the company starts to perform the sooner should be able to negotiate with the government to get its incentive plan underway) and expect the company to consider deploying cash to drive growth.

Exhibit 14: Average revenue growth for the beer industry has been slowing Exhibit 15: Average OP growth for the beer industry has been slowing Historical revenue growth of key beer players in the world with China exposure (% Historical OP growth of key beer players in the world with China exposure (% YoY) Yoy)

Beer sales growth Beer OP growth 25% 25%

20% 20% 15%

15% 10% ABI: 9% 5% Heineken: 6% Tsingtao: 3% 10% ABI: 9% 0% SABMiller: -3% SABMiller: 7% -5% 5% CR Snow: 5% -10% Carlsberg: -9% Tsingtao: 3% 0% Heineken: 0% -15% CR Snow: -15%

Carlsberg: -3% -20% -5% -25% 2011201220132014 2011 2012 2013 2014

Source: Company data. Source: Company data.

Goldman Sachs Global Investment Research 13 June 23, 2015 China: Consumer Staples

2. US$170bn of potential financial resources available for value creation Exhibit 17 shows that most global beer players (ABI, SAB, Carlsberg and Heineken) appear to be comfortably geared, with net debt/equity of between 53% and 74% in 2015E. Asian players (Asahi, CR Snow, Tsingtao and Yanjing) are even more conservative, with positions ranging from net cash to a 29% net debt/equity in 2015E.

Collectively, we calculate a potential war chest of US$170bn available for M&A transactions globally among the eight companies shown in Exhibits 16 and 17 that have exposure to China. The largest player is ABI, with an estimated US$114bn of resources available for M&A, based on our assumption of 5x Net Debt/EBITDA in 2016E, while SAB and Heineken have US$24bn and US$15bn, respectively. We use a lower 4x Net Debt/EBITDA assumption for the Asian players given their historically more conservative stance on gearing, resulting in between US$1bn and US$4bn of potential M&A funds for the Asian players. For CR Snow, we add the HK$10bn (c.US$1.3bn) credit facility extended by its parent China Resources Holdings (CRH) for three years (announced on June 18, 2015) to its available financial resources.

Exhibit 16: We calculate an aggregate US$170bn of possible funds for M&A, led by ABI’s US$114bn (based on 5x 2016E Net Debt/EBITDA) Potential funds available for M&A, by company (2015E)

Available funds for M&A ‐ US$bn

120.0 113.9

100.0

80.0

60.0

40.0 24.3 15.5 20.0 3.9 4.1 3.5 2.9 1.2 ‐

Note: Grouped in order of Global, European, Japanese, Chinese companies.

Source: Company data, Goldman Sachs Global Investment Research.

Goldman Sachs Global Investment Research 14 June 23, 2015 China: Consumer Staples

Exhibit 17: We believe there could be US$170bn of available funds for acquisition for brewers that may have an interest in investing in China Calculation of financial resources for acquisitions

US$ mn ABI SAB Carlsberg Heineken Asahi CR Snow Tsingtao Yanjing 2015E 2016E 2015E 2016E 2015E 2016E 2015E 2016E 2015E 2016E 2015E 2016E 2015E 2016E 2014 Cash 8,135 14,430 1,910 1,684 361 377 766 935 711 775 N/A N/A 945 856 286 Gross Debt 49,222 195,740 20,704 25,763 5,036 4,782 12,702 15,509 2,875 2,634 70 70 312 Net Debt 41,087 181,310 18,795 24,079 4,675 4,405 11,936 14,574 2,164 1,858 476 476 ‐875 ‐785 26 Equity 58,775 66,218 25,959 28,531 8,766 9,411 16,072 17,681 7,483 7,820 3,174 3,174 2,672 2,919 2,210

EBITDA 18,738 31,273 6,461 7,133 1,936 2,008 5,490 6,012 1,624 1,629 607 667 449 487 301

Net Debt/EBITDA 2.2 5.8 2.9 3.4 2.4 2.2 2.2 2.4 1.3 1.1 0.8 0.7 (2.0) (1.6) 0.1 Net Debt/Equity 70% 274% 72% 84% 53% 47% 74% 82% 29% 24% 15% 15% ‐33% ‐27% 1% EBITDA Interest Cover* 9.1 3.4 6.9 5.9 8.3 9.1 9.2 8.2 15.0 17.5 25.5 28.0 (10.3) (12.4) 231.2 Assumptions Net Debt/EBITDA 5.0 5.0 5.0 5.0 4.0 4.0 4.0 4.0 Net Debt/Equity 236% 125% 107% 170% 83% 84% 67% 54% EBITDA Interest Cover* 4.0 4.0 4.0 4.0 5.0 5.0 5.0 5.0

Net Debt 156,363 35,665 10,038 30,058 6,515 2,669 1,947 1,204 Loan from CRH 1,285 Financial Resources available 113,940 24,291 3,931 15,489 4,066 3,478 2,906 1,178 Note: * The interest coverage ratio, also known as times interest earned, is a measure of how well a company can meet its interest-payment obligations.

Source: Company data, Goldman Sachs Investment Research.

Goldman Sachs Global Investment Research 15 June 23, 2015 China: Consumer Staples

3. China assets appear attractively valued Global beer acquisition multiples have increased noticeably in recent years, primarily due to rising asset scarcity. On average, global beer acquisitions since 2010 averaged an EV/Ltr of US$6.0 compared to an average of US$3.7/Ltr in 2001-2010. In contrast, due to lower prices and margins, China’s beer assets have transacted at a significantly lower average EV/Ltr of c.US$1.2 since 2010. While we believe this is due to a lower quality asset at present, we see clear potential upside on both prices and margins driven by industry consolidation and premiumization. As such, we consider that China’s beer assets are currently attractively valued, offering potential for higher sales growth and improvement in profitability.

Exhibit 18: Global beer transaction multiples have increased noticeably over Exhibit 19: In contrast, China’s beer multiples remain low in terms of EV/Ltr the last 15 years given lower ASP and margins, although we see clear upside potential driven Global beer acquisition multiples – EV/Ltr (in US$) by industry consolidation and premiumization China beer acquisition multiples – EV/Ltr (in US$)

Acquisition EV/Ltr Linear (Acquisition EV/Ltr) Acquisition EV/Ltr Linear (Acquisition EV/Ltr)

14.0 3.0 Carlsberg/ Chongqing 12.0 SAB/Foster's 2.5

10.0 Kirin/Lion Nathan 2.0

8.0 ABI/Modelo Heineken/APB 1.5 Carlsberg/Chongqing

6.0 Carlsberg/Heineken ABI/Henan Weixue ABI/Oriental Brew Inbev/Sedrin CR Snow/Kingway 1.0 4.0 ABI/Jinshibai Inbev/Anheurser Anheuser/Harbin Beer Tsingtao/Xin Immense Molson CR Snow/Blue Sword

ABI sold Oriental Note the scalable difference on Exhibit 18 Corrs/Starbev 0.5 Asahi/Tsingtao 20%) Colson/Moors Brewery to KKR 2.0 CR Snow/Qingyuan Interbrew/Ambev Heineken/Femsa CR Snow/Hupo ABI/Dafuhao SAB/Miller CR Snow/Yinyan - - May-02 Nov-02 May-03 Nov-03 May-04 Nov-04 May-05 Nov-05 May-06 Nov-06 May-07 Nov-07 May-08 Nov-08 May-09 Nov-09 May-10 Nov-10 May-11 Nov-11 May-12 Nov-12 May-13 Nov-13 Oct-04 Oct-05 Oct-06 Oct-07 Oct-08 Oct-09 Oct-10 Oct-11 Oct-12 Oct-13 Feb-05 Feb-06 Feb-07 Feb-08 Feb-09 Feb-10 Feb-11 Feb-12 Feb-13 Feb-14 Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Jun-14

Source: Company data Source: Company data

Goldman Sachs Global Investment Research 16 June 23, 2015 China: Consumer Staples

4. SOE reform more welcoming of foreign investment China’s domestic beer players typically have a state-owned background. CR Snow, Tsingtao and Yanjing are 25% (the government owns 52% of CRE, which in turn owns 51% of CR Snow), 31% and 59% government owned respectively. As such, these companies fall within the scope of recent SOE reform in China, which is expected to have the three key impacts at the company level:

1) Mixed ownership structure: Allow state-owned enterprise to seek external investor’s equity investment;

2) Management incentives: Encourage the senior management and employees to hold equity or other forms of incentives which ties them more closely to a company’s operational performance, so as to improve efficiency;

3) Asset restructuring: State-owned enterprise to reorganize its subsidiary assets and/or merge the similar business in order to extract synergy.

Exhibit 20: CR Snow, Tsingtao and Yanjing are 52%/31%/59% owned by the government and hence are within the scope of China’s recent SOE reform Ownership structure of China’s domestic beer companies (as of June 2015)

Source: Company data

Goldman Sachs Global Investment Research 17 June 23, 2015 China: Consumer Staples

The first initiative of “mixed ownership” where state-owned enterprises are allowed to seek strategic investors is interesting. Looking across CR Snow, Tsingtao and Yanjing, the first two already have strategic investors (CRE – SABMiller; Tsingtao – Asahi), while Yanjing is the only one without.

Yanjing Brewery, the fourth largest player in terms of 2014 volume share in China, is an SOE with a 59% stake owned by Beijing local SASAC (State-owned Assets Supervision and Administration Commission) and listed on the (Exhibit 20).

As a front-runner of SOE reform, the Beijing government released its guidance on reform in 2014, classifying local SOEs into three types: 1) urban public service company, 2) special function company, and 3) competitive market company. For the first two types of company, the government will have to hold more than 60% ownership, while for the third type the government is not obliged to hold a majority stake but only give strategic support. Additionally, the government will implement more market-oriented corporate governance for the company whose state ownership is lower than 50%. Under Beijing’s guidance, the beer industry (including Yanjing) is classified as Type 3 (competitive market), thus industry participants would be encouraged to promote a mixed ownership structure and seek external investors’ equity participation. According to a February 9, 2015 news report (source: Bloomberg), companies could look to sell a c. 20% equity stake to a strategic investor.

The second initiative of management incentive that is more clearly tied with the company’s operational performance also gives more reason for companies to improve profitability, or use cash to acquire for growth. Yanjing and Tsingtao have both announced a timeline for incentive plans – including Yanjing being within the next three years and Tsingtao by 2020. With both of these companies challenged for growth but with comfortable balance sheets, we expect they will increasingly look towards inorganic growth or the bringing in of a strategic partner to jumpstart growth as a viable option.

Goldman Sachs Global Investment Research 18 June 23, 2015 China: Consumer Staples

Government approval the biggest hurdle

The biggest hurdle we see to beer industry consolidation is China’s government policy. All prospective M&A in China is subject to approval from China’s Ministry of Commerce (MOFCOM). Among other things, key considerations applied during these deliberations include: 1) China’s Anti-Monopoly Law, and 2) foreign ownership of iconic Chinese consumer brands.

1. Anti-Monopoly Law has historically been lenient The Anti-Monopoly Law was enacted in August 2008 and aims to prohibit companies from abusing dominant positions to influence market pricing and competition. While there is no explicitly stated permissible market share threshold for M&A, monopolistic behavior is generally monitored and controlled through three pillars: 1) merger control, 2) prohibition of “monopoly agreements” between competitors, such as price fixing, and 3) abuse of dominant market position such as sale of products at unfairly high prices or selling below cost.

While it is impossible for us to predict the outcome of any potential transactions, the law does have a relatively lenient definition of what constitutes a “market influential position” and we note that all deals involving MNCs in the past have been approved, except for Coca-Cola and Huiyuan Juice in 2009. That said, we believe that it is the first time in China that the government will be tested with potential M&A that could lead to combined market share of above 30% in a homogenous market and previous M&A transactions may not qualify as sufficient precedents. In assessing the merits of potential transactions in the beer industry, we see two key points worth highlighting:

 Definition of “market influential position”: The law defines the market influential position as ‘one operator holds more than 50% of market share’ or ‘two operators combined hold more than 66% market share’ in the respective market. We note that the combined market share of the first and second players – CR Snow and Tsingtao – is only 43% of volume market share as of 2014.

 Precedents: Since the law became effective in 2008, the only meaningful M&A case rejected in Consumer Staples was Coca- Cola’s proposal to acquire Huiyuan Juice (1886.HK) in 2008. After a prolonged investigation MOFCOM rejected the case in mid- 2009, not on grounds of the combined market share being too high, but rather on Coca-Cola’s potential use of its dominant position in the Carbonated Soft (CSD) market to drive anti-competitive behaviour (e.g. bundle-and-tie the selling of Huiyuan Juice drink with CSDs). However, none of the cases listed in Exhibit 21 involve two or more players in the same industry that after merger could amount to 30% or more market share, hence they may not qualify as sufficient precedents.

Goldman Sachs Global Investment Research 19 June 23, 2015 China: Consumer Staples

Exhibit 21: Since anti-monopoly law enactment in 2008, all bar one transaction in Consumer Staples involving domestic and MNC players have been approved by MOFCOM in China Timeline of domestic and MNC M&A deals in Consumer Staples in China

2004 Jun: Beer 2008 Sep: Juice- 2009 Apr: Beer - 2011 Dec: Snack - 2014 Sep: Meat - - ABI acquired Coca-Cola acquired Asahi acquired Nestle acquired KKR acquired Harbin 100% Huiyuan 100% (Failed) Tsingtao 20% XuFuJi 60% COFCO Meat 70%

2004 20062008 2009 2011 2013 2014 2015

2006 Jan: Beer - 2011 Apr: Beverage 2013-14: Dairy - 2015 Apr: Beverage ABI acquired - Nestle acquired Danone acquired - Coca-Cola acquired Sedrin 100% Yinlu 60% Mengniu 9.9% Culiangwang 100%

Source: Company data

2. Foreign ownership of iconic Chinese consumer brands  Beer industry classified as less crucial for high government ownership: As discussed earlier, the Beijing government released its guidance on reform in 2014, classifying its local SOEs as three types, with beer companies classified as Type 3 companies (competitive market company), where the government is not obliged to hold a majority stake but only give strategic support. While industry classification for beer in other provinces remains to be seen (SOE reform is expected to be gradually rolled out nationally), we believe Beijing’s classification serves as a strong indicator of the likely industry classification for beer in other provinces.

 SAB currently holds more of CR Snow than the government: As shown in Exhibit 20, of the three domestic beer companies in China that are partly owned by the government, CR Snow is the only one that is owned more by a foreign investor (SAB with a 49% stake) than the Chinese government (CRH – a SOE – indirectly holds 25%). CRH is in the process of a partial tender of an additional 20% share in CRE, taking its indirect share of CR Snow to c.37% if fully satisfied, although this is still below SAB’s stake. We note that it is unusual for foreign players to be able to hold a larger stake in a Chinese company compared to the government. Within the China Consumer Staples, examples of foreign ownership include: 1) China Foods Beverages: 65%/35% JV between China Foods/Coca-Cola; and 2) Mengniu: 16%/10%/5% owned by COFCO/Danone/Arla. These examples suggest a pattern whereby the Chinese government likes to have the largest ownership stake compared to foreign investors. This could imply that if ABI were to merge with SAB globally, then the newly merged JV partner may need to divest down to below the government holding of c.37% (if the partial tender successfully fills 20%) in the future.

Goldman Sachs Global Investment Research 20 June 23, 2015 China: Consumer Staples

Who are “ready”, “willing” and “able” parties?

Based on the assumption that M&A activity is on the rise in China’s beer industry, in this section we aim to identify potential combinations among the eight beer companies with exposure to China. We assess the merits of each combination of these using the criteria of “ready” (industry regulatory, company specific hurdles), “willing” (strategic fit) and “able” (financial capability). These represent our opinion on the likely key influencers of M&A decisions, although we recognize that the list is not exhaustive and final reasons resulting in M&A could be very different to these (i.e. a range of outcomes exist outside what we present).

1. Strategic fit: Whether the combination of the two companies would fit each other’s global growth aspirations as well as geographical footprint.

2. Financial capability: Whether the acquirer has sufficient cash/funding available to consider the deal. We determine that a company is financially capable of considering a deal if: 1) its financial resources available for M&A (as determined in Exhibits 16 and 17) are above the current market cap (as of June 19, 2015) of the company to be acquired; or 2) its available finances are above at least 20% of the potential target’s current market cap (as of June 19, 2015) and that the potential target may be open to a strategic partner.

3. Regulatory support: This assesses whether the business combination is likely to be compliant with the current SOE reform directives as well as Anti-Monopoly rules enacted by China.

4. Clear company specific hurdles: This primarily considers current ownership structure and also company specific considerations (for example, ABI has historically preferred acquiring a controlling stake).

The assessment framework used here is broadly in-line with the framework adopted by our European team in their report ‘Last Orders: US$400bn of M&A in European beverages’, published April 10, 2013.

Our reasoning and opinions are presented in Exhibits 22 and 23 and accompanying notes.

Goldman Sachs Global Investment Research 21 June 23, 2015 China: Consumer Staples

Exhibit 22: Identifying the “ready”, “willing” and “able” parties

Potential Acquirer

Yanjing Tsingtao CR Snow SAB Miller Carlsberg ABI Heineken Asahi

Yanjing Note 1 Note 1 Note 1 Note 1 Note 1 Note: 7 Note 1

N/A Strategic fit? √√ √√X√

N/A Financially Capable? √ √ √√√√

N/A Combined China beer volume share? 30% 35% 16% 28% 12% 11%

N/A Regulatory support? √ X √√√√

N/A Void of company specific hurdles? √ √ √X√X

Tsingtao Note: 2Note: 2Note: 2Note: 2Note: 7Note: 2 Asahi currently owns 20% of N/A Strategic fit? N/A √ √√XTsingtao

N/A N/A Financially Capable? X √ √√√

N/A N/A Combined China beer volume share? N/A 43% 24% 36% 20%

N/A N/A Regulatory support? N/A X √X√

N/A X Void of company specific hurdles? N/A X XXX Potential Target Potential CR Snow Note: 3 Note: 3 Note: 3 Note: 8 Note: 7 Note: 3 SAB currently owns 49% of CR Strategic fit? N/A √ Snow √√X√

N/A Financially Capable? X √ √√√√

N/A Combined China beer volume share? N/A 43% 29% 41% 25% 24%

N/A Regulatory support? N/A X √X√√

N/A Void of company specific hurdles? N/A X XXXX

SAB Miller Note: 8 SAB Miller is already the 49% Strategic fit? N/A N/A JV partner to CR Snow N/A √ N/A N/A

Financially Capable? X X X X √ X X

Combined China beer volume share? N/A N/A N/A N/A China: 43% N/A N/A

Regulatory support? N/A N/A N/A N/A X N/A N/A

Void of company specific hurdles? N/A N/A N/A N/A X N/A N/A

Notes: Dark grey: financially not feasible; Light grey: strategically not compatible; Blue: existing partnership. Market share data as of 2014 full year.

Source: Company data, MOFCOM, Goldman Sachs Global Investment Research.

Goldman Sachs Global Investment Research 22 June 23, 2015 China: Consumer Staples

Exhibit 23: Identifying the “ready”, “willing” and “able” parties

Potential Acquirer

Yanjing Tsingtao CR Snow SAB Miller Carlsberg ABI Heineken Asahi

Carlsberg Note 4 Note 4 Note 4

Strategic fit? N/A N/A N/A X X X N/A

Financially Capable? X X X √ √ √ X

Combined China beer volume share? N/A N/A N/A N/A N/A N/A N/A

Regulatory support? N/A N/A N/A N/A N/A N/A N/A

Void of company specific hurdles? N/A N/A N/A X X X N/A

ABI

Strategic fit? N/A N/A N/A N/A N/A N/A N/A

Financially Capable? X X X X X X X

Combined China beer volume share? N/A N/A N/A N/A N/A N/A N/A

Regulatory support? N/A N/A N/A N/A N/A N/A N/A

Void of company specific hurdles? N/A N/A N/A N/A N/A N/A N/A Potential Target Potential Heineken Note: 5 Note: 5

Strategic fit? N/A N/A N/A √ N/A √ N/A

Financially Capable? X X X √ X √ X

Combined China beer volume share? N/A N/A N/A N/A N/A N/A N/A

Regulatory support? N/A N/A N/A √ N/A √ N/A

Void of company specific hurdles? N/A N/A N/A X N/A X N/A

Asahi Note: 6 Note: 6 Note: 6 Asahi already owns 20% stake Strategic fit? N/A in Tsingtao N/A X N/A X X

Financially Capable? X X X √ X √ √

Combined China beer volume share? N/A N/A N/A N/A N/A N/A N/A

Regulatory support? N/A N/A N/A N/A N/A N/A N/A

Void of company specific hurdles? N/A N/A N/A N/A N/A N/A N/A

Notes: Dark grey: financially not feasible; Light grey: strategically not compatible; Blue: existing partnership. Market share data as of 2014 full year.

Source: Company data, MOFCOM, Goldman Sachs Global Investment Research.

Goldman Sachs Global Investment Research 23 June 23, 2015 China: Consumer Staples

Notes: Dark grey colored boxes: These combinations signify financially non-feasible combinations. We come to such a conclusion if the financial resources available for M&A (as determined in Exhibits 16 and 17) are below the company’s current market cap (as of June 19, 2015) and if a partial share sale of the company appears unlikely.

1. Acquiring Yanjing: Financially, our analysis implies that all players could afford a stake in Yanjing. Moreover, given Yanjing’s current 11% market share of volumes in China, regulatory approval should be less of an issue. The company’s dominant market share in the Beijing and Guangxi provinces could be a good strategic fit for players looking to expand nationally. The key question is whether Yanjing wants to sell. Given its solid balance sheet (Net Debt/Equity of just 1% as of 2014), Yanjing does not need money. However, faced with increasing competitive pressure and encouragement under SOE reform for mixed ownership, Yanjing may consider introducing a strategic investor to help enhance its premium brand portfolio and/or expand nationally outside of Beijing. Key hurdles: i) CR Snow-Yanjing would have a combined market share of 35%, which may be subject to regulatory scrutiny; ii) ABI typically prefers to acquire majority stakes, although it previously acquired a 27% stake in Tsingtao and currently owns a 20% stake in Zhujiang ; and iii) Asahi currently has a 20% stake in Tsingtao already, thus its ability to acquire Yanjing would be contingent on Asahi being able to dispose of its stake back to Tsingtao as it is precluded from selling its stake to existing market competitors.

2. Acquiring Tsingtao: Financially, it appears that all players could afford a stake in Tsingtao. Strategically, Tsingtao’s established brand and dominant position in China’s North (Shandong and Heibei) provinces would be a strategic fit for players looking to further market share. However, Tsingtao is currently China’s second largest player with 19% market share and any potential tie- up with the largest player - CR Snow - and third largest player - ABI - may be subject to anti-monopoly scrutiny. Moreover, Tsingtao is currently 20% owned by Asahi. Unless Asahi divests this stake, the likelihood of introducing another strategic partner appears low.

3. Acquiring CR Snow: Financially, all players could afford a stake in CR Snow. Strategically, CR Snow’s established brand, national footprint, and dominant position in the China mass market category, are attractive additions for players looking to further market share. However, CR Snow is currently China’s largest player with 24% market share and any potential tie-up with second largest player - Tsingtao - and third largest - ABI - may be subject to anti-monopoly scrutiny. Moreover, CR Snow is currently 49% owned by SABMiller. Unless SABMiller divests this stake, the likelihood of introducing another strategic partner looks low. See Note 8 for more detail on the implications for CR Snow if ABI were to acquire SAB.

4. Acquiring Carlsberg: Financially, SABMiller, ABI and Heineken could afford a stake in Carlsberg. Strategically, we believe Carlsberg looks less attractive to acquirers given its key market exposure is in Western Europe and Russia. Moreover, the Carlsberg Foundation holds 30% of the shares and 75% of the voting rights, thus any ultimate decision to sell would depend on a decision by the Foundation.

5. Acquiring Heineken: The Heineken family has a controlling stake of Heineken N.V. through their 52% shareholding in Heineken Holding. The company rejected a takeover approach from SABMiller on September 15, 2014 and we see little reason to believe that the family’s stance on offers to sell has changed.

6. Acquiring Asahi: Asahi has very limited presence in China, via its 20% stake in Tsingtao and sales of its SuperDry brand beer. As such, for players looking to acquire market share in China, we believe Asahi would be the wrong strategic fit.

Goldman Sachs Global Investment Research 24 June 23, 2015 China: Consumer Staples

7. Heineken-Yanjing/Tsingtao/CR Snow: Heineken has a niche market position targeting the super-premium beer segment using its Heineken and Tiger brands. In 2011, Heineken divested its 21% share in Kingway in Guangdong Province. With Tsingtao currently owned 20% by Asahi, and CR Snow 49% by SABMiller, that would leave Yanjing as the only likely acquisition candidate for Heineken in the near term unless Asahi and SABMiller were to divest the aforementioned stakes.

8. ABI-SABMiller/CR Snow: Our European analyst Mitch Collett expects ABI to deploy US$145bn in 2016E, as the company searches for synergy led growth post completion of the Modelo transaction in 2012. When looking at potential targets within global beverages, SABMiller screens as the most attractive strategic asset based on our GS Competitive Positioning framework (see ‘Anheuser-Busch InBev (ABI.BR): The compound king; reiterate Buy and add to the Conviction List’, published October 9, 2014 for more details). To reflect SAB’s strategic qualities, we apply an M&A rank of 1 and incorporate a 30% M&A weighting in our price target.

If ABI were to acquire SAB, this would have implications for CR Snow, which is 49% owned by SAB. The combined China beer market share would be 41%. While the Anti-Monopoly Law typically defines a “market influential” position as two players having over combined market share of 66%, the Chinese government may consider other factors such as ownership of national brand or higher foreign ownership vs. government ownership (see section “Government approval the biggest hurdle”, page 19).

Transactions that could create the right brew; ABI-SAB-CR Snow, Tsingtao-CR Snow

While we acknowledge that a range of outcomes exist outside of what is illustrated in Exhibits 22 and 23, we now take a closer look at two potential transactions that could be the most impactful from a market structure point of view, based on our “ready”, “willing” and “able” criteria. However, we do not take a view on the likelihood of a particular deal happening.

CR Snow-Tsingtao could drive a No. 1 market share, but holdings hurdles and limited synergies While our analysis shows that a combination of Tsingtao and CR Snow is not impossible (and could lead to a 43% market share in China, based on 2014 data), there are company ownership hurdles in place. Asahi currently owns a 20% stake in Tsingtao and is precluded from the sale of this stake to existing market competitors. Moreover, CR Snow is 49% owned by SABMiller. Unless these two strategic partnerships were to be divested, the likelihood of a CR Snow-Tsingtao combination appears low. Financially, our analysis of available funds for M&A (Exhibits 15 and 16) suggests that both parties could afford a minority stake in each other. However, strategically, there would likely be lower sales and cost synergies given lower geographical overlap, a less strong footprint in the fast growing premium beer segment, and both would lack the benefits of global sourcing. We note from Exhibit 25 that Tsingtao’s strongest markets are in China’s North, while the key premium markets are in China’s South and East where ABI is stronger. As a result, a combination of CR Snow and Tsingtao would be unlikely to yield an enhancement in each other’s competitive position in China’s faster growing premium beer category.

Goldman Sachs Global Investment Research 25 June 23, 2015 China: Consumer Staples

ABI-SAB-CR Snow could drive significant sales and cost synergies Based on the assumptions that if: 1) ABI and SABMiller were to merge globally (as widely discussed in the press, including the Wall Street Journal on September 15, 2014 and Bloomberg on September 16, 2014), and 2) ABI was allowed to retain a strategic partnership with CRE (SAB owns 49% of CR Snow), the combination of these players would control a 41% market share in China (based on 2014 data). Given this potential leading market share position, and taking into account the regional exposure of each company (see Exhibits 24-27), a combination of ABI-SAB-CR Snow could post significant sales and cost synergies.

Geographic footprint and portfolio are key drivers of potential synergies In China, CR Snow currently has a dominant position in nine provinces – with above 30% market share. Similarly, ABI also has above 30% market share in seven provinces. These two players together would lead to significant market leadership in a number of provinces. In addition, the companies have product portfolios that are highly complementary – while CRE is the dominant player nationally in the mass market category, ABI currently has c.47% market share of the premium market and plans to introduce the super-premium segment in China including Corona.

Besides sales synergies, a ABI-SAB-CR Snow combination could also see cost synergies – since CRE’s current utilization rate is only c.60%, it could potentially begin producing some ABI portfolio products (including Harbin Beer, Budweiser or Corona) to lift overall production efficiency and save ABI from the need to build further organic capacity. Further cost synergies could come from ABI’s global sourcing and global marketing.

In order to achieve these sales and cost synergy benefits, ABI may not necessarily have to keep its stake at 49% in CR Snow. It could be the case where the Chinese government requests that ABI reduce its stake in CR Snow to below the government holding stake of c.37% (if the already announced partial tender for an additional 20% of CRE by CRH, taking its interest from current 52% to 72%, is successful).

If ABI were required by the Chinese government to fully divest its inherited stake in CR Snow upon acquiring SAB globally then we understand that CR Snow would have a first right of refusal to repurchase the 49% stake from SAB, according to CRE management. If CRE were to have 100% control of CR Snow, the market competitive dynamic would be little changed from now with CR Snow, Tsingtao and ABI as the top 3 players. Under this instance, we would expect competition to remain intense and margin progression towards 20% plus EBIT margins (Exhibit 11, Scenario 2) to be more prolonged. We would expect 2019E industry operating profit margins to be closer to 10% (e.g. Exhibit 11, Scenario 1).

Goldman Sachs Global Investment Research 26 June 23, 2015 China: Consumer Staples

Exhibit 24: CRE has dominant market share >30% in 9 provinces in China Exhibit 25: Tsingtao has dominant market share >30% in 4 provinces in China

Exhibit 26: ABI has dominant market share >30% in 7 provinces in China Exhibit 27: Yanjing has dominant market share >30% in 3 provinces in China

Source for all charts: Company data, Baidu.com

Goldman Sachs Global Investment Research 27 June 23, 2015 China: Consumer Staples

Appendix 1: China’s beer industry – premiumization the key catalyst

As shown in Scenario 1 of Exhibit 11, on an organic growth basis we expect China’s beer industry to record an increase in retail sales from US$77bn in 2014 to US$110bn by 2019E. This would imply an 8% CAGR over the next five years, with an incremental US$33bn in revenues making China the largest growth opportunity in the global beer industry over the next five years. As per capita incomes rise, we expect product premiumization to become the biggest driver of industry growth, and we forecast volume CAGR of c.2% vs. price CAGR of c.5% over the next five years.

Premiumization is the key catalyst In 2014, premium beer market retail sales of US$16bn made up 21% of the total China beer market (source: Euromonitor). We forecast the premium market growing to US$32bn of total sales by 2019E, making up 29% of the total China beer market. This implies premium beer market sales 5-year CAGR of 15% (Exhibit 31), compared to the total beer market sales CAGR of 8%, outpacing mid-priced beer at 9% CAGR and mass beer at 3% CAGR over the same period.

China’s Top 3 players by market share (as of 2014) – CR Snow, Tsingtao and ABI – dominate three different segments of the beer market. ABI, through its Budweiser brand, had a 47% of China’s premium beer segment as of 2014 (see Exhibit 32). While Tsingtao has been losing share in the premium segment, it maintains a steady 30% share of the mid-priced segment (as of 2014). CR Snow, via its premium series 勇闯天涯 (Brave New World) has been gaining share in both the mid-priced and economy tiers.

Exhibit 28: China beer pricing hierarchy – CR Snow dominates mass, Tsingtao has steady share in mid, and ABI is strong in premium China beer pricing hierarchy (as of June 5, 2015)

330ml/tin (6 pack, RMB) CRE Tsingtao ABI Yanjing Carlsberg

Snow Black Beer 8.0 Tsingtao Black Beer 7.6 Corona 9.1 Yanjing Draft Beer 5.8 Calsberg Ice-pure 6.7 Snow Draft Beer 6.0 Tsingtao Draft Beer 8° 7.2 Budweiser Draft Beer 7.4 Calsberg Techun 6.7 High-End (>RMB5/unit) Tsingtao Augerta 500ml 5.6 Budweiser Beer 6.3 Calsberg Beer 4.3° 5.0

Snow Yongchuangtianya 4.0 Tsingtao Classic 1903 4.1 Harbin Bingchun (Ice-pure) 3.7 Yanjing Alcohol-free Beer 3.8 Calsberg Tuborg 3.8 Snow Jingzhi Beer (Quality) 3.8 Tsingtao Classic 11° 3.9 Yanjing Draft 11° 3.8 Mid-End (RMB3-5/unit) Kingway Beer 3.0 Tsingtao Beer 3.8 Tsingtao Hans 3.8

Snow Dry Beer 2.5 Tsingtao Shanshui 3.0 Harbin Wheat King 2.8 Yanjing Jingpin (Fine) 11° 2.8 Snow Refreshing 2.3 Tsingtao Bingchun 8° 3.0 Fujian Sedrin 2.5 Yanjing Draft Beer 10° 2.8 Mass (below RMB3/unit) Snow Refined Beer 9° 2.3 Tsingtao Laoshan 10° 2.4 Harbin Bingshuang Beer 2.3 Yanjing Beer 2.3 Snow Beer 2.0 Tsingtao Ice Beer 2.2 Yanjing Beer (Party) 8° 2.1

Source: Tmall.com

Goldman Sachs Global Investment Research 28 June 23, 2015 China: Consumer Staples

Exhibit 29: We forecast China beer retail sales growth to be driven by 2.4% Exhibit 30: We forecast premium beer sales in China to grow at 15% CAGR in volume and 5% ASP growth annually over the next 5-years the next 5-years, reaching US$32bn by 2019E China beer retail sales, volume and ASP growth (% YoY) China beer retail sales (US$mn)

Industry sales YoY Volume growth YoY Mass Mid Premium 120,000 ASP growth YoY 25.0% 100,000 32,114 20.0% 80,000 15.0% 15,787 10.0% 60,000 33,276 21,489 5.0% 40,000 0.0% 20,000 39,495 45,120 -5.0%

- 2009 2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E

Source: Euromonitor, MOFCOM, Goldman Sachs Global Investment Research estimates Source: Euromonitor, Goldman Sachs Global Investment Research estimates

Exhibit 31: We expect premium beer to experience the highest growth in Exhibit 32: ABI’s Budweiser brand has maintained a dominant market share China over the next 5-years in China’s premium market

2014-19E 5-yr retail sales CAGR Premium Beer Volume Share % 20% 60

15.3% 16% 50 47.4% Bud

12% 40 9.1% 7.6% 30 8%

20 4% 2.7% 10.7% 10 Tsingtao 5% Heineken 0% 3.5% Total Beer Retail Premium Mid Mass 0 Carlsberg 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Sales Chill Source: Goldman Sachs Global Investment Research estimates Source: Euromonitor.

Goldman Sachs Global Investment Research 29 June 23, 2015 China: Consumer Staples

Branding crucial With the brewing process similar across players, the biggest differentiator between a premium and an economy beer is often its branding. The high amounts of absolute investment required mean that national players who can drive large volumes have a real competitive advantage that cannot be matched by regional players. Global players, who often have world-wide sponsorship deals in place, have an even further advantage. A good example is the global marketing reach of No.1 player – ABI. ABI’s Budweiser brand sponsors the FIFA World Cup and the National Basketball Association (NBA) globally. As such, ABI can leverage its global bargaining power to secure domestic sponsorship deals for its second national brand – Harbin beer, who is the Chinese sponsor for the FIFA World Cup and NBA. In contrast, China’s second player Tsingtao, which also emphasizes sports marketing, lost its China NBA sponsorship deal to ABI in 2011 and is now generally seen sponsoring more regionally focused events such as the Asian Football Confederation and China Basketball Association (CBA). CR Snow has moved away from mainstream sports sponsorship deals altogether, carving out a niche for more extreme outdoor sports and photography competitions to establish the lifestyle focus of its mid-high end brands 勇闯天涯 (Brave New World) and Snow Draft.

Exhibit 33: Summary of key sponsorship campaigns by Top 5 China beer players (as of 2014) Soccer Basketball Olympics

ABI Global FIFA World Cup Global NBA International Sponsors AFC Champions Regional sponsor for Tsingtao League (亚冠联 赛)CBA China Olympics Spanish Football CR Snow League (LFP) N/A N/A Regional sponsor for Yanjing N/A N/A China Olympics

Carlsberg N/A N/A N/A

Source: Company data, Baidu.com

Tsingtao losing out to ABI and CRE Among the Top 4 players in China by market share, premium player ABI is currently recording the strongest volume and ASP growth, while CRE is also benefiting from strong pricing momentum from positive mix shift. In contrast, domestic premium player Tsingtao is running into market share losses due to under-investment on brand and what we view as an overly conservative stance on acquisitions, causing it to lose valuable market share in key, premium markets such as China’s South and East. Fundamentally, we see CRE entering a virtuous cycle of product and price upgrades, which allows it to re-invest into market share and premium branding. At the same time, Tsingtao is stuck in a difficult place of either having to step up spending to re-invigorate an ageing brand, or continue to hold up profits with heavy SG&A cuts, despite its falling topline. We believe the divergent strategies will continue to drive disparity in market share and continue to prefer CRE (Buy) over Tsingtao (Sell). For further details, please see our Tsingtao report “Volume drop not priced in; premium brand challenged; down to Sell”, published February 12, 2015.

Goldman Sachs Global Investment Research 30 June 23, 2015 China: Consumer Staples

Exhibit 34: Industry volume growth has been impacted by the anti-corruption Exhibit 35: ABI and CRE have generally led pricing growth in China since drive in China and poor weather during peak season in 2014 2Q13 China beer – quarterly volume growth trend China beer – quarterly ASP growth trend

Market Tsingtao CR Snow Yanjing ABI (China) Tsingtao CR Snow Yanjing ABI 25.0% 25.0% 20.0% 20.0%

15.0% 15.0%

10.0% ABI: 4.70% 10.0% ABI: 10.10% 5.0% CR Snow: 2.9% CR Snow: 5.0% 0.0% Yanjing: 1.9% 5.0% Market: (2.2%) (5.0%) Tsingtao: 2.5% Tsingtao: (5.5%) 0.0% Yanjing: 2.3% (10.0%)

(15.0%) -5.0%

(20.0%) -10.0% (25.0%)

(30.0%) -15.0% 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15

Source: Company data, MOFCOM. Source: Company data.

Goldman Sachs Global Investment Research 31 June 23, 2015 China: Consumer Staples

Appendix 2: A lesson from the US; not everyone is a winner in industry consolidation

The US experience tells us that not all players benefit equally amidst industry consolidation. As the US beer industry jumped in market concentration from the 1960s to 1980s, No. 1 player based on market share Anheuser Busch saw its sales and profits multiply, while No. 2 player Schlitz disappeared. Similarly, in China, even though we expect market consolidation to accelerate, we do not expect all players to benefit. Strategic missteps can still drive market share loss and earnings deflation.

China reminiscent of the US in the 1970s Looking at the China beer market now, we believe that many parallels can be drawn with the US beer market in the 1970s and 1980s. From the 1960s through to the early 1970s, the US market was represented by a large number of first tier and second tier players. During this period, the first tier players really broke away from the second tier players due to the ability to execute national marketing programs, which the regional second tier players simply could not match. In 1970, the Top 5 players had approximately 50% market share and the industry Herfindahl index was 6.8% – still an intensely competitive market.

Exhibit 36: Industry leaders’ progression table – the US market consolidated from eight leading players in the 1950s to just two today List of leading brewers in the US through time

1950-1964 1965-1974 1975-1986 1987-1995 1996-2000 2001-2008 2008-Current First Tier Anheuser-Busch Anheuser-Busch Anheuser-Busch Anheuser-Busch Anheuser-Busch Anheuser-Busch ABI-Inbev Pabst Miller Miller Coors Coors SAB Miller Miller Coors Schlitz Pabst Schlitz-Stroh Miller Miller Molson Coors Schlitz

Second Tier Ballantine Falstaf f Pabst Heileman Pabst Carling Heileman Corrs Pabst Stroh Falstaff Schaefer Genesee Stroh Hamm Stroh Heileman Miller

Source: Euromonitor, The U.S. Brewing Industry by Tremblay & Tremblay (2005).

In 1970, Philip Morris acquired the remaining 47% outstanding shares of Miller and the industry embarked on what is known as the “beer wars” of the 1970s. Philip Morris subsidized the operations of Miller, expanded production capacity aggressively and significantly lifted spending on marketing. At the same time, Miller launched a brand proliferation strategy, and launched a large number of new products. emerged as extremely successful and established the light beer category. The burden of high marketing spend and market share loss continued to force out weaker players. This included the No. 2 player at the time – Schlitz. By the end of 1980, the market share of the Top 5 players had increased to 74.4%, and the Herfindahl index more than doubled to 15.4%.

Goldman Sachs Global Investment Research 32 June 23, 2015 China: Consumer Staples

Exhibit 37: Market share of Anheuser Busch and Miller continued to escalate Exhibit 38: As the market share of Anheuser Busch (BUD) improved, so did its throughout the 1970’s, at the expense of Schlitz and Pabst profitability US beer industry sales by product category

Anheuser Shlitz Pabst Miller 35% BUD EBIT Margin Bud Mkt Share 30.0% 60.0%

30%

25.0% 50.0%

25%

20.0% 40.0% 20%

15.0% 30.0% 15%

10% 10.0% 20.0%

5% 5.0% 10.0%

0% 1951 1952 1953 1954 1955 1956 1957 1958 1959 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 0.0% 0.0% 1951 1953 1955 1957 1959 1961 1963 1965 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001

Source: The U.S. Brewing Industry by Tremblay & Tremblay (2005). Source: Company data, The U.S. Brewing Industry by Tremblay & Tremblay (2005).

As strict anti-trust regulations kept large US brewers from merging with each other, market share was won organically via competitive advantages in scale and marketing. No. 2 player Schlitz was displaced from its seat in the late 1970s, essentially because of its strategic decision to cut costs and reduce price in the face of disruptive competition by Miller. This, and the fact that it did not have a good premium offering when the segment in the market was growing, tarnished the brand image. In contrast, Anheuser Busch kept pace with Miller’s marketing spend, drove its scale advantage to become a low cost producer, and maintained a diversified portfolio that appealed to all price points in the market. By 1990, Anheuser Busch and Miller alone had 69% market share, and the Herfindahl index increased to 28.5%, corresponding to a large lift in industry profit.

We acknowledge that the US experience may not be entirely comparable to that we expect to occur in China. The strict anti-trust laws in the US kept the market leaders from merging with each other, while in China we believe there is a possibility that M&A could accelerate. If this does happen, the repercussions of more speedy market consolidation may be significantly different to that of the US experience.

Goldman Sachs Global Investment Research 33 June 23, 2015 China: Consumer Staples

Disclosure Appendix Reg AC We, Lisa Deng, Mitch Collett, Nicole Thain and Keiko Yamaguchi, hereby certify that all of the views expressed in this report accurately reflect our personal views about the subject company or companies and its or their securities. We also certify that no part of our compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report.

Unless otherwise stated, the individuals listed on the cover page of this report are analysts in Goldman Sachs' Global Investment Research division. Investment Profile The Goldman Sachs Investment Profile provides investment context for a security by comparing key attributes of that security to its peer group and market. The four key attributes depicted are: growth, returns, multiple and volatility. Growth, returns and multiple are indexed based on composites of several methodologies to determine the stocks percentile ranking within the region's coverage universe. The precise calculation of each metric may vary depending on the fiscal year, industry and region but the standard approach is as follows: Growth is a composite of next year's estimate over current year's estimate, e.g. EPS, EBITDA, Revenue. Return is a year one prospective aggregate of various return on capital measures, e.g. CROCI, ROACE, and ROE. Multiple is a composite of one-year forward valuation ratios, e.g. P/E, dividend yield, EV/FCF, EV/EBITDA, EV/DACF, Price/Book. Volatility is measured as trailing twelve-month volatility adjusted for dividends. Quantum Quantum is Goldman Sachs' proprietary database providing access to detailed financial statement histories, forecasts and ratios. It can be used for in-depth analysis of a single company, or to make comparisons between companies in different sectors and markets. GS SUSTAIN GS SUSTAIN is a global investment strategy aimed at long-term, long-only performance with a low turnover of ideas. The GS SUSTAIN focus list includes leaders our analysis shows to be well positioned to deliver long term outperformance through sustained competitive advantage and superior returns on capital relative to their global industry peers. Leaders are identified based on quantifiable analysis of three aspects of corporate performance: cash return on cash invested, industry positioning and management quality (the effectiveness of companies' management of the environmental, social and governance issues facing their industry). Disclosures Coverage group(s) of stocks by primary analyst(s) Lisa Deng: Asia Pacific Consumer and Retail. Mitch Collett: Europe-Beverages, Europe-Food. Nicole Thain: Europe-Beverages. Keiko Yamaguchi: Japan-Consumer Products. Asia Pacific Consumer and Retail: Ace Hardware Indonesia, Amorepacific, BGF Retail, Biostime International Holdings, China Foods, China Modern Dairy Holdings, China Resources Enterprise, China Shengmu Organic Milk Ltd., CJ CheilJedang, CP ALL PCL, E-Mart, Eclat Textile Co, Far Eastern Department Stores, Fonterra Shareholders Fund, Greatview Aseptic Packaging Co., GS Retail Co., , Huishan Dairy, Hyundai Department Store, KT&G, LG Household & Healthcare, Lotte Shopping, Makalot Industrial Co, Matahari Department Store, Mengniu Dairy, Mitra Adiperkasa, Orion, PChome Online Inc., President Chain Store, PT Gudang Garam Tbk, PT Indofood CBP Sukses Makmur, PT Indofood Sukses Makmur Tbk, PT Kalbe Farma Tbk, PT Unilever Indonesia Tbk, Group Holdings Ltd, Shinsegae, Stella International Holdings, Sun Art Retail Group, Taiwan FamilyMart Co. Ltd., Tingyi (Cayman Islands) Holdings, (A), Tsingtao Brewery (H), Uni-President China Holdings, Uni-President Enterprises, Holdings, WH Group Ltd., Yue Yuen Industrial. Europe-Beverages: Anheuser-Busch InBev, Britvic Plc, C&C Group, Carlsberg, Coca-Cola HBC AG, Davide Campari, Diageo, Heineken, Pernod Ricard, Remy Cointreau, SABMiller. Europe-Food: Agrana, Aryzta, Associated British Foods, Barry Callebaut, Chr Hansen, Dairy Crest, Danone, Kerry, Lindt & Sprungli, Nestle, Novozymes, Orkla ASA, Suedzucker AG, Tate & Lyle, Unilever, Unilever Plc. Japan-Consumer Products: Ajinomoto, Asahi Group Holdings, Calbee Inc, Ezaki Glico Co., Japan Tobacco, Kao, Kikkoman, Kirin Holdings, Meiji Holdings, NH Foods Ltd, Nissin Foods Holdings, Pola Orbis Holdings, Shiseido, Suntory Beverage & Food Ltd., Toyo Suisan Kaisha, Unicharm, Yamazaki Baking. Company-specific regulatory disclosures Compendium report: please see disclosures at http://www.gs.com/research/hedge.html. Disclosures applicable to the companies included in this compendium can be found in the latest relevant published research Distribution of ratings/investment banking relationships Goldman Sachs Investment Research global coverage universe

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Goldman Sachs Global Investment Research 34 June 23, 2015 China: Consumer Staples

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Goldman Sachs Global Investment Research 35 June 23, 2015 China: Consumer Staples

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